Parsing Mutual Fund Probe's Latest Shifts

By Julavits, Robert | American Banker, December 4, 2003 | Go to article overview

Parsing Mutual Fund Probe's Latest Shifts


Julavits, Robert, American Banker


Is Bank of America Corp. enjoying a first-mover advantage in the mutual fund trading scandal?

It's a question some on Wall Street are asking in the wake of Bank One Corp.'s disclosure last week that it expects a regulatory enforcement action against its mutual fund adviser. The statement surprised some observers who initially believed the company's involvement in the scandal was not as serious as Bank of America's.

The public portion of New York Attorney General Eliot Spitzer's investigation -- which came to light on Sept. 3, when he announced a $40 million settlement with the New Jersey hedge fund Canary Capital Partners LLC

initially focused much more closely on B of A than Bank One.

In his complaint against Canary, he spent 13 pages detailing B of A's relationships with the hedge fund and made allegations of late trading, which is illegal, and market timing, a controversial and apparently pervasive practice. Numerous e-mails by B of A employees were presented as exhibits. Mr. Spitzer's allegations against Bank One mainly involved market timing and took up only two pages of the complaint. There were no exhibits involving the Chicago company.

Since then, the balance has shifted and, at least publicly, the two companies have responded very differently to the matter, with B of A making a series of high-profile changes and dismissals and Bank One keeping a relatively low profile.

B of A appears to have had a head start in preparing its response. In an interview in early September, Kenneth D. Lewis, B of A's chairman and CEO, said that even though he could not remember the exact date he learned of the investigation, "we did know there were issues prior to Mr. Spitzer's announcement."

By contrast, Bank One on Sept. 3 said it had just learned of the investigation.

Still, Richard X. Bove, an analyst with Hoefer & Arnett Inc., said that the two companies' starkly different approaches to the investigation could explain the apparently divergent responses by regulators.

B of A reacted "extraordinarily sharply and extraordinarily fast," firing several executives and immediately indicating that it would provide restitution and change its practices, said Mr. Bove. It also selected three independent entities -- two individuals and a consulting firm -- to review its internal controls, practices, and processes.

"They jumped on it so fast it almost made your head spin," he said. And B of A's "potent lobbying force" likely did not hurt, either.

Bank One also fired a few individuals but pursued an internal investigation, and according to Mr. Bove, it did not "make any meaningful changes" in the fund group's policies and procedures until last week, when it released a detailed list of governance changes.

Because it moved more slowly and "didn't take dramatic actions," Mr. Bove said, "maybe now it's being hit harder than Bank of America."

Mr. Spitzer made it clear in announcing a $1.4 billion settlement with Wall Street firms over an earlier investigation that he looks favorably on those who cooperate.

Though Mr. Spitzer filed criminal charges against a B of A employee soon after he announced his investigation on Sept.

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